Department Can’t Go Behind TRC Issued By The Other Tax Jurisdictions: Delhi High Court

The Delhi High Court has quashed the reassessment and held that the department cannot go behind the Tax Residency Certificate (TRC) issued by the other tax jurisdiction.

The division bench of Justice Manmohan and Justice Manmeet Pritam Singh Arora has observed that the reason given for reopening the assessment, namely, to verify the nature and genuineness of the transactions of the assessee in the assessment year, was untenable in law as the return of income had been filed by the assessee within time with full particulars. The notice has been issued on borrowed satisfaction, which is impermissible in law.

The petitioner/assessee acquired equity shares of Agile Electric Sub Assembly Private Limited, a company incorporated in India, in two tranches. The petitioner sold all the equity shares of Agile to Igarashi Electric Works Limited ("Igarashi") and other parties on July 30, 2015.

The petitioner electronically filed its return of income. In terms of the return of income, the petitioner claimed that the gains earned by it on the sale of Agile shares were not taxable in India by virtue of Article 13(4) of the India-Singapore DTAA, based on the Tax Residency Certificate (TRC).

The petitioner made all the required disclosures with regard to the investment and sale of shares, such as that it is a non-resident of India and that the majority of its directors were residents of Singapore.

The petitioner’s return of income was processed under Section 143(1) of the Act with no demand. A notice was issued to the petitioner under Section 148 of the Act for the assessment year 2016–17. The petitioner filed a return of income and requested the reasons.

The issue raised was whether the department can go behind the tax residency certificate issued by the other tax jurisdiction and issue a reassessment notice under Section 147 of the Income Tax Act, 1961, to determine issues of residence status, treaty eligibility, and legal ownership.

The petitioner contended that the reopening of the assessment cannot be done on "apprehension" or to verify the genuineness and taxability of the transaction. It was stated that the reasons recorded were based on mere suspicion and surmises. It was stressed that the purported reasons were based on information received from another officer who had no rational connection to the formation of the belief.

The department contended that ordinarily, no writ lies against the show cause notice. He emphasized that the scope of interference with the show cause notice in a writ jurisdiction is extremely restricted in comparison to the appellate jurisdiction that this Court exercises under Section 260A.

"The respondent revenue cannot go behind the TRC issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, and legal ownership and accordingly there is no capital gain earned by the petitioner liable to tax in India. Even the clarificatory press release dated March 1, 2013, issued by the Finance Ministry pursuant to the 2013 amendment makes it clear that a TRC is to be accepted and tax authorities cannot go behind it. Further, since on the basis of repeated assurances by the Government of India which have been upheld by the Apex Court, the petitioner had invested in India, the respondent is estopped from arguing to the contrary," the court said.

The court quashed the reassessment proceedings without jurisdiction and the notice under Section 148 and the subsequent draft assessment order under Section 144C.

Case Title: Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. Versus ACIT

Citation: 2023 LiveLaw (Del) 125

Date: 30.01.2023

Counsel For Petitioner: Advocates Porus F. Kaka, Vishal Kalra, S.S. Tomar, Divesh Chawla

Counsel For Respondent: Advocates Sunil Kumar Agarwal, Tushar Gupta, Utkarsh Tiwari

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